By Sudeepto Mukherjee, EVP, Head of Financial Services, Publicis Sapient
Most incumbent banks today are reliant on critical systems and processes that were developed over 2-3 decades ago. While banks have done a great job in modernising some areas of their infrastructure like creating modern digital channels for everyday banking, deploying new ATMs, offering faster payment processing, a lot of their systems are still dated and often even unsupported by their original creators. These systems are often fundamental to a banks’ operations as they are the system of record for customer and transaction data and also perform all important computations like risk and interest calculations. To make matters worse, the same data and functions reside in multiple duplicate systems because of past mergers and acquisitions.
This legacy infrastructure and processes in banking are increasingly seen as a crucial barrier to digital transformation. There are a variety of reasons why these systems have not been updated. For one, their complexity and critical nature makes them harder and more costly to enhance. Also, after the 2008 financial crisis, banks had to divert most of their investments in strengthening controls and creating adequate capital buffers. This prevented them from focusing on adopting the newer technologies like Cloud, AI, smart interfaces that have become mature and mainstream during that same time. New Fintechs have emerged that have taken advantage of the flexibility and compute power of these new technologies to facilitate banking functions more easily — like payments, onboarding and core banking. As a result, the disparity between the legacy technology used by traditional “big banks” and the new, agile, digital systems and Fintechs used by their challenger competitors is now stark. So-called ‘Legacy’ for a reason, these systems have been operating for decades and with some much money passing through them daily, changing them is not a simple task. Many banks know they must change, but the risk and complexity of doing so makes them adverse.
The weight of this legacy is constraining banks’ ability to move quickly to meet customer needs and be competitive. The recently released Global Banking Benchmark Survey by Publicis Sapient sheds insight into how banks are falling behind in the race to digitise their processes and operating models despite a strong driver and desire to transform. The report cites changing customer expectations as well as competition from both other incumbents and neo-banks/Tech companies as the key drivers for Digital transformation. In a post-COVID world, it is evident that customers expect to interact with their banks seamlessly via Digital channels for their simple day to day needs. This, coupled with the rise of innovative Fintechs and neo banks offering easy to use digital services in areas like payments, lending, personal finance management makes it an imperative for all Banks to offer world class digital services.
Despite this strong imperative to transform, a majority of the banks surveyed (54%) say they are yet to make significant progress on executing their digital transformation plans. What makes this more interesting is that 67% of the surveyed banks say that rapid, fundamental change, rather than incremental progress, is needed to achieve their digital transformation objectives. So why are most banks falling behind despite the strong driver and desire for rapid change?
The report evidences that the weight of legacy is simply slowing banks down. Antiquated platforms and the lack of access to data is preventing banks from offering more sophisticated products and services. Banks list upgrading their core banking platforms, implementing aggregated data stores to create 360 customer views and automating/adding intelligent processes as their top priorities to create a compelling digital proposition. However, these legacy platforms and issues are proving hard to change.
So how should banks transition away from legacy and what are the new architectural models of the future? Most experts now agree that a modern bank needs to be “coreless” – no longer dependent on a monolithic, inflexible legacy platform for their core functionality but an ecosystem of distributed microservices often powered by the latest Fintech held together by well designed APIs and underpinned by a central data store that drives decisioning.
4 key areas need to be enhanced to meet this idea of a coreless, flexible customer centric architecture.
Integrated view of the customer: One aspect of legacy is the siloed channels that exist today in most banks. A customer doing a transaction online and then calling a call centre for help, might not get the seamless service they expect because of the lack of a single view of the customer across the bank. This is not only impacting customer experience but also prevents banks from missing key cross selling opportunities. New Customer Data Platform (CDP) products from firms like SalesForce, Adobe and Google, now make it easier for firms to aggregate all their customer data and use that one golden source to drive marketing and service interactions. Introducing a CDP along with channel modernisation, can start to create a seamless experience for customer and also create operational efficiencies by using AI to prompt colleagues for next best action based on a comprehensive data set.
API first model: The current legacy platforms often are tightly coupled and hard to extend to meet disparate consumer needs. In the current environment, most product or services are likely to be consumed by multiple channels and consumers. New paradigms like embedded finance and regulations like PSD2 have added complexity by introducing partners that also need to be served along with direct customers. Legacy platforms struggle to do this. This is only possible via a API first model where banks must design robust consumer centric APIs that can meet the needs of the myriad of consumers while obfuscating the complexities of the underlying functions/systems. Products like Kong, Apigee and Mulesoft allow banks to create this comprehensive API layer. The design of these APIs are critical as they need to be future proof and not change often unlike the underlying systems that they expose.
The modern core: The most complex legacy for a bank will likely be their core banking system. This is the system of record for all customer accounts, transactions and product information. Over the years the core has evolved into large monolithic systems that have gone well beyond their core functionality and expanded into areas like onboarding, product control and payments. This has made them inflexible and create barriers for banks to introduce new features and functionality. . Most banks now realise that it is essential to move to a more light and flexible core that provides the basic system of record but can connect to other more agile systems for peripheral specialised functionality. A new breed of cloud native core banking platforms like Thoughtmachine, Mambu and 10x now offer this flexible and modern core that can be leveraged by banks. A lot of Tier 1 banks have started POCs to start the migration to these new cores and some have also invested in these platforms to get an advantage.
Realtime access to aggregated data: Finally, data remains the essential ingredient for all digital transformations. Without access to realtime and accurate data, it is hard to drive customer engagement and make customer centric choices/decisions. A banks’ data is typically stored in an array of data stores with inconsistent ontology and restricted, non-real time access. Banks must tackle this area to accelerate their transformation goals. New technologies and tools like data mesh, data bricks and semantic graphs offer solutions for these issues. Rightly designed data architectures can meaningfully enhance all channels.
Banks must make it a priority to move away from legacy and adopt these newer technologies to create a competitive advantage. A “coreless” bank will allow incumbents to be nimble and allow richer and more flexbile customer propositions thus challenging the neobanks. However, to make this transition in a less risky free and value driven way, banks need to change their culture and enhance their capability. Today’s digital world requires an agile mindset across the organsation and new capabilities in areas like digital, APIs etc. Leadership needs to invest in building these capabilities within their organisation and also create a culture that embraces change rather than see it as a risk that needs to be managed. CIOs and their teams need to encourage partnering with leading FinTechs/service to provide a flexible, low-cost ecosystem rather than relying on their old monolithic platforms which was easier to control but are unwieldy and expensive to maintain. Newer technologies and platforms will make this transition easier if coupled with this new capabilities and culture.
In summary, it is clear that banks realise the imperative to act now to modernise their technology and accelerate digital transformation. By focussing on the fundamentals of culture and capability and embracing new technologies/finTechs, Banks can lift the curse of legacy and rapidly create a digital future that will allow them and their customers to thrive.